GOI (MCA) Notification - Personal Guarantors

          

  THE GAZETTE OF INDIA : EXTRAORDINARY

[PART II—SEC. 3(ii)]

MINISTRY OF CORPORATE AFFAIRS

NOTIFICATION

New Delhi, the 15th November, 2019

S.O. 4126(E).In exercise of the powers conferred by sub-section (3) of section 1 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby appoints the 1st day of December, 2019 as the date on which the following provisions of the said Code only in so far as they relate to personal guarantors to corporate debtors, shall come into force:

• (1) clause (e) of section 2;

• (2) section 78 (except with regard to fresh start process) and section 79;

• (3) sections 94 to 187 [both inclusive];

• (4) clause (g) to clause (i) of sub-section (2) of section 239;

• (5) clause (m) to clause (zc) of sub-section (2) of section 239;

• (6) clause (zn) to clause (zs) of sub-section (2) of section 240; and

• (7) section 249.

[F. No. 30/21/2018-Insolvency Section]

GYANESHWAR KUMAR SINGH, Jt. Secy.

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Narinder Singh Azad Vs. Bank of Baroda - Therefore, the application being completed under the provisions of Section 94 of IBC, 2016 and reasons recorded in the report of the Resolution Professional is hereby admitted under section 100 of the IBC.

NCLT New Delhi-III (15.02.2021) in  Narinder Singh Azad  Vs. Bank of Baroda   [IA - 4332 (ND)/2020 & IA-4207/2020 ] held that; 

• It is also stated that the Corporate Debtor viz., V Anlez Technologies Private Limited was dissolved vide Order dated 26.07.2019 passed by the Hon'ble High Court.

• However, from the report there does not appear any request of the Resolution Professional for issuance of the instructions for the purpose of conducting negotiations between the debtor and creditors for arriving at the repayment plan. Therefore, the application being completed under the provisions of Section 94 of IBC, 2016 and reasons recorded in the report of the Resolution Professional is hereby admitted under section 100 of the IBC, 2016 by initiating the Insolvency Resolution Process in CP IB -859/PB/2019 against the Applicant/Debtor and the moratorium is declared as provided under Sec 101 of IBC

Excerpts of the order; 

# 1. The Resolution Professional has filed two application out of which the application IA - 4207/2020 is the Written consent to act as Resolution Professional (Form A) filed by the Resolution Professional viz., Mr. Ravinder Singh Kathuria (hereinafter referred as "Resolution Professional") who was appointed vide Order dated 28.9.2020. The Resolution Professional has declared that there are no disciplinary proceedings initiated by the Board or the Insolvency Professional Agency, he does not suffer from any disability and is eligible to be appointed as Resolution Professional of the Guarantor. Therefore, as prayed the application is taken on record. 

# 2. It is recalled that on presentation of the application by the Personal Guarantor/Debtor the Resolution Professional was appointed to file report under Section 99 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred as "IBC, 2016") which has been filed bearing number IA - 4332 (ND)/2020. The Resolution Professional has stated that at this juncture he is not in a position to recommend for treating the Application under Fresh Start under Chapter II. The Resolution Professional has prayed for admission of the application filed under section 94 of IBC, 2016 in order to make through Investigation. 

# 3. The report provides that the Financial Creditor viz., Bank of Baroda (earlier · Vijaya Bank) had instituted a recovery suit before Debt Recovery Tribunal, New Delhi in the year 2014 and the Judgement was passed in the year 2016 however, the executing proceedings are pending in the Debt Recovery Tribunal against the Personal Guarantor/Debtor. It is also stated that the Corporate Debtor viz., V Anlez Technologies Private Limited was dissolved vide Order dated 26.07.2019 passed by the Hon'ble High Court. Further, it is stated that the total debt including interest and penalties w.e.f. 03.01.2014 of Bank of Baroda (earlier Vijaya Bank) was Rs. 5,51,83,692 alongwith cost of Rs. 1,50,000/- on the suit amount till the realisation and as per the recovery certificate issued by the DRT, New Delhi. It is stated that the loan was secured with 3 (three) properties of the Personal Guarantor/Debtor and the loan amount was classified as NPA in the year 2012. 

# 4. The Report further states that in reply the Personal Guarantor/Debtor has submitted that the total outstanding is to the tune of Rs. 3.52 Crores after realisation of the sale proceeds of the assets kept as Security. 

# 5. However, from the report there does not appear any request of the Resolution Professional for issuance of the instructions for the purpose of conducting negotiations between the debtor and creditors for arriving at the repayment plan. Therefore, the application being completed under the provisions of Section 94 of IBC, 2016 and reasons recorded in the report of the Resolution Professional is hereby admitted under section 100 of the IBC, 2016 by initiating the Insolvency Resolution Process in CP IB -859/PB/2019 against the Applicant/Debtor and the moratorium is declared as provided under Sec 101 of IBC, 2016. During the moratorium period; 

• a) Any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and 

• b) The creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt; and 

• c) The debtor shall not transfer, alienate, encumber, or dispose off any of his assets or his legal rights or beneficial interest therein; 

• d) The provisions of this section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. 

# 6. The Resolution Professional viz., Mr. Ravinder Singh Kathuria, who has been appointed under Section 97 vide Order dated 28.09.2020, is directed to cause a public notice on behalf of the Adjudicating Authority within 7 days of uploading of this Order on the website of the NCLT Delhi, inviting claims from all Creditors, who shall register their claims as provided under Section 103 within 21 days of such issuance. The notice shall contain the necessary information as provided under Section 102 (2) of IBC, 2016. The publication of notice shall be made in newspapers, one in English and other in Vernacular which has wide circulation in the State where the Debtor resides. The copy of the notice shall be affixed in the premises of this Authority and the Registry shall place a copy of the same on the website of this. Authority. 

# 7. The Resolution Professional in exercise of the powers conferred under section 104 shall prepare a list of creditors within 30 days from the date of the notice. The debtor shall prepare a repayment plan in consultation with the Resolution Professional as provided under Section 105, which shall include the provisions for payment of fee to the Professional. The Resolution Professional shall submit the repayment plan with his report within a period of 21 days from the last date of submission of claims as provided under Section 106. The Resolution Professional will convene a meeting of the Creditors, If he is of the opinion that the meeting of the creditors should be summoned. The date of meeting should not be less than 14 days or more than 28 days from the date of submission of the Report under Sub section (1) of Section 106, for which at least 14 days' notice to the creditors (as per the list prepared] shall be issued by all modes fulfilling the requirements as per the provisions of section 107. 

# 8. The meeting of the creditors shall be conducted in accordance with Sections 108, 109, 110 & 111. The Resolution Professional shall prepare a report for repayment of plan as provided under Section 112 and submit the same to this Authority by providing a copy to the debtor and the Creditors. It is made clear that the Resolution Professional shall perform his function and duties in compliance with the code as provided under section 208 of the IBC, 2016. 

# 9. In terms of the above, the Insolvency Resolution Process stands initiated against the Debtor/Personal Guarantor. 

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Blogger’s comments; In the present case the corporate debtor was dissolved much before the application was filed by the personal guarantor under section 94. As such in the present case the Adjudicating Authority as per section 79 is DRT. 

# Section 60. Adjudicating Authority for corporate persons. -

(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of a corporate person is located.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before the National Company Law Tribunal.

(3) An insolvency resolution process or liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.

Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms 

# Section 78. Application. -

This Part shall apply to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.

# Section 79. Definitions. -

In this Part, unless the context otherwise requires, -

(1) “Adjudicating Authority” means the Debt Recovery Tribunal constituted under sub section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (51 of 1993);

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Insta Capital Private Limited Vs. Ketan Vinod Kumar Shah - An application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor.

 NCLT Mumbai-IV (27.04.2021) in  Insta Capital Private Limited Vs. Ketan Vinod Kumar Shah  [CP (IB)/ 1365/MB-IV/2020] held that; 

• this bench is of the considered view that an application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two course one is NCLT and another is the Debts Recovery Tribunal.

Excerpts of the order; 

# 2. This Petition has been filed by the Applicant (Financial Creditor) Insta Capital Private Limited, under Section 95 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as Code) read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (Personal Guarantors Insolvency Rules) against Ketan Vinod Kumar Shah, Personal Guarantor/Respondent of the Corporate Debtor S.K. Products LLP, for initiating Insolvency Resolution Process.

# 3. The brief facts of the case are that the Corporate Debtor S.K. Products LLP, had applied for sanction of loan from the Financial Creditor vide application form dated 05.10.2018. The total amount due is Rs.31,52,781/- which includes principal outstanding of Rs.27,50,000/- alongwith interest of Rs.4,02,781/- @18% p.a. from 12.04.2019 to 03.02.2020. The debt was due as on 12.04.2019, and the default occurred on 12.04.2019.

# 5. S.K. Products LLP, vide letter dated 10.10.2018, proposed disbursal against Bill of Exchange. The financial creditor had advanced a cheque dated 11.10.2018 bearing No. 930048 and executed a demand Bill of Exchange dated 11.10.2018 alongwith the discount letter dated 11.10.2018, Post-dated cheques issued by S.K. Products LLP to Financial Creditor which got dishonored on presentation. The Financial Creditor issued loan recall notice to the guarantor and sent demand notice dated 03.02.2020 under Rule 7(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

# 8. The Ld. Counsel for the Financial Creditor had relied upon the judgment of Hon’ble National Company Law Appellate Tribunal (hereinafter referred as NCLAT) in the case of State Bank of India Vs. Athena Energy Ventures Private Limited, in which it is held that Corporate Insolvency Resolution Process (hereinafter referred as CIRP) can be initiated against both the Corporate Debtor as well as personal guarantor simultaneously for the same set of debt and default. The Hon’ble NCLAT relied upon the observations made by the Insolvency Law Committee at Para 14 which is reproduced hereunder : -

• “14. It would be appropriate now to refer to the observations made by Insolvency Law Committee in its Report of February 2020. Relevant part of the report has been filed by the Appellant as Annexure-C (Diary No. 233/3). Para 7 of the report is as follows:

• 7.3 The Committee noted that while, under a contract of guarantee, a creditor is not entitled to recover more than what is due to it, an action against the surety cannot be prevented solely on the ground that the creditor has an alternative relief against the principal borrower. Further, as discussed above, the creditor is at liberty to proceed against either the debtor alone or the surety alone or jointly against both the debtor and surety. Therefore, restricting a creditor from initiating CIRP against both the principal borrower and the surety would prejudice the right of the creditor provided under the contract of guarantee to proceed simultaneously against both of them.

• 7.5  However, the committee noted that the appellate authority has, in certain cases, taken a view contrary to its decision taken in the Piramal Enterprises Ltd.  Case. For example, in Edelweiss Asset Reconstruction Company Limited V. Sachet Infrastructure Private Limited & Others., the Appellate Authority has permitted simultaneous initiation of CIRP against the principal borrower and its corporate guarantors. Further, the appellate authority has also admitted a petition to review its aforesaid judgment in the Piramal Enterprises Limited case  Give this, the Committee decided that no legal changes may be required at the moment, and this issue may be left to judicial determination.”

# 9. The Hon’ble NCLAT at Para 19 has categorically held that in the matter of guarantee, CIRP can proceed against the principal borrower as well as guarantor.

# 11.In view of the ratio laid down by the Hon’ble NCLAT in the matter of State Bank of India Vs. Athena Chhattisgarh Power Ltd., the Financial Creditor for initiate proceedings simultaneously against the principal borrower and the corporate guarantor. In the case of Edelweiss Asset Reconstruction Company Limited Vs. Sachet Infrastructure Limited and others, the Hon’ble NCLAT permitted simultaneous initiation of CIRP against the principal borrower and its corporate guarantor.

# 12.The Personal Guarantor/Respondent had filed Affidavit in reply and raised preliminary objections against the maintainability of Petition u/s 95 on the following grounds: -

• a. section 60(1) of the Code envisages that the National Company Law Tribunal will have jurisdiction in relation to Insolvency Resolution and liquidation of Corporate Persons including Corporate Debtor and personal guarantors. But however;

• b. section 60(2) categorically stipulate notwithstanding anything contained in the Code where the Insolvency Resolution Process or liquidation proceedings against the Corporate Debtor is pending before National Company Law Tribunal.

• c. The jurisdiction to entertain Insolvency and Bankruptcy proceedings against the individual will vest in the National Company Law Tribunal (hereinafter referred as NCLT) only on the following conditions:

- i. the individual is a personal guarantor to the debt availed by the corporate debtor;

- ii. an Insolvency Resolution Proceedings with respect to said Corporate Debtor is pending before the said NCLT; or 

- iii. liquidation proceeding with respect to corporate debtor is pending before NCLT.

• d. Unless the aforesaid connections are met, NCLT shall not have jurisdiction for the insolvency qua the individuals as the said jurisdiction is specifically vested with the Debts Recovery Tribunals at part 3 of the Code.

FINDINGS

# 13.We have carefully gone through the pleadings available on record, and opine that, though it is settled law that the liability of principal borrower and guarantor is coextensive as enunciated u/s 128 of the Contract Act, 1872, and the Creditor may proceed against the principal borrower or the guarantor simultaneously, however, the judgement of Hon’ble NCLAT in the case of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Limited, it was laid down that there cannot be two CIRP proceedings, one against the borrower and one against the guarantor.

# 14.The judgment of Hon’ble NCLAT in State Bank of India Vs. Athena Energy Ventures Private Limited, further clarified that CIRP can be initiated against the principal borrower and the guarantor.

# 17.Upon conjoined reading of section 60 r/w section 128 of the Contract Act, 1872, it is clear that the CIRP can be initiated against the Corporate Debtor as well as corporate guarantor. But however, in the instant case, section 60(2) contains a non-obstante clause which specifies that only where a CIRP process or liquidation process of a Corporate Debtor is pending before NCLT, an application initiating Insolvency Resolution Process against the Personal Guarantor, of such Corporate Debtor shall be filed before such NCLT. Further, the code also provides the definition of personal guarantor which includes the surety in a contract of guarantee to a Corporate Debtor which means that Financial Creditor can initiate proceedings of CIRP against the personal guarantor of Corporate Debtor. While Section 7 petition can be filed by the Financial Creditor against the Corporate Debtor and Corporate Guarantor, but under Section 95 of the Code can be filed by Financial Creditor only against personal guarantor of Corporate Debtor, which is already been undergoing CIRP or is in Liquidation.

# 18.In view of the judgement of Hon’ble NCLAT in State Bank of India Vs. Athena Energy Ventures Limited and the law as entailed in section 60(2), this bench is of the considered view that an application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two course one is NCLT and another is the Debts Recovery Tribunal.

# 19.In view of the above observation, the petition is dismissed with no costs.

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